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Osaka Vacancy Rate’s Sharp Fall Led by Grade A segment​

Highlights

The Osaka Grade A vacancy rate declined 1.7 points q-o-q to 2.8%, the first time it has fallen below 3% since Q2 2008

The Nagoya Grade A vacancy rate rose 0.7 points q-o-q to 4.0% due to secondary vacancy

Rents rose for the third consecutive quarter in all regional cities besides Tokyo, Osaka, and Nagoya

CBRE expects Tokyo Grade A rents to peak in 2H 2017, before entering a period of gradual decline

■ Tokyo 23 Wards​

The All-Grade vacancy rate in Tokyo's 23 Wards resumed its decline in Q4 2016, falling by 0.3 points q-o-q to 2.3%. Long standing vacant spaces in recently constructed buildings were filled up by existing tenants that required extra space or new tenants that were relocating to expand. A number of buildings in relatively inexpensive areas also saw a decline in vacant spaces. Although tenants remain cost-conscious, companies that are planning to increase staff numbers are continuing to look for office space and demand for larger offices from expanding companies is solid. Furthermore, if the Yen continues to weaken, companies especially in the manufacturing and service industries are likely to assume a more earnest stance on relocating as the outlook for earnings improves.

The Grade A vacancy rate in Tokyo increased slightly, rising 0.1 points q-o-q to 2.8% in Q4 2016. Several leases were signed for vacant units of around 500 tsubo in existing buildings, as tenants opened new offices or added to their existing office space. Meanwhile, as in Q3 2016, this quarter saw one new building reach completion with space still available for lease. A number of Grade A buildings are due to be completed between now and the end of 2017; they are all taking longer to let than in previous quarters. Consequently, some owners who prioritize occupancy rates are starting to adopt a more flexible approach to rental terms and conditions, including offering slightly longer rent-free periods. CBRE still expects Tokyo Grade A office rents to peak in H2 2017 before entering a period of gradual decline.

Grade A assumed achievable rents rose by 0.6% q-o-q to JPY 35,950 per tsubo in Q4 2016. Excluding the impact of new buildings which raised the overall average, the movement in rents is generally sluggish. "Owners are starting to adopt a more flexible approach to rental terms and conditions ahead of the large volume of new supply scheduled to be completed in 2018 and onwards," said Junichi Taguchi, managing director of CBRE’s Advisory and Transaction Services. "This is likely to provide opportunities for companies that had given up on relocating because of high rents a chance to move into high-grade buildings."

■ Osaka​

The Osaka All-Grade vacancy rate declined by 0.7 points q-o-q to 3.9% in Q4 2016, falling below 4% for the first time since Q4 2007. Grade A offices, which had been a quiet segment of the market in recent quarters, saw an increase in leasing activity, driving down the overall vacancy rate in Osaka.

The Osaka Grade A vacancy rate declined 1.7 points q-o-q to 2.8% in Q4 2016, falling below 3% for the first time since Q2 2008. During the quarter, several companies that had been considering relocations for some time finally made firm commitments to move. Even a number of less competitive Grade A buildings made progress with letting this quarter. Rental increases were recently most noticeable in the Grade B segment, but Grade A rents are likely to gain upward momentum in the coming quarters.

"The vacancy rate this quarter declined more than expected," commented Takashi Katono, executive director of CBRE's Kansai branch. "Until recently, many tenants have avoided buildings with relatively high rents. However, with very little new supply in Osaka, tenants may have started to feel a greater sense of urgency to secure space. However long they wait, units are not coming onto the market, and the choices available for relocation continue to shrink."

■ Nagoya

The All-Grade vacancy rate in Nagoya was flat for the second consecutive quarter at 4.1% in Q4 2016. Tenants across a wide range of industries including finance and services were observed to be seeking office space during the quarter. Sizable spaces were let to a number of tenants in large and newly constructed buildings that had unlet units remaining. However, a number of buildings where tenants had moved out failed to promptly find new tenants for reasons including the age of the facilities and the distance from a railway station.

The Nagoya Grade A vacancy rate rose for a second consecutive quarter in Q4 2016, increasing by 0.7 points to 4.0%. This was mainly because of spaces in the Nagoya Station area being vacated by tenants who moved to the newly completed buildings within the vicinity. Two large buildings are scheduled to be completed in the Nagoya Station area in Q1 2017, one of which will be almost fully let. The vacancy rate is expected to continue to edge upwards, as the large volume of new supply is likely to cause vacancy in existing buildings. Grade A assumed achievable rents fell by 0.2% q-o-q to JPY 23,500 per tsubo in Q4 2016. Owners of existing buildings have slightly lowered asking rents ahead of the completion of the large new buildings.

"The office market in Nagoya remains tight," commented Takahiro Fujimoto, executive director of CBRE’s Nagoya branch. "During the quarter, there was a slight rise in the Grade A vacancy rate, but it remained below 5%. Although the completion of the large office buildings could have some impact, leasing demand is stable and the vacancy rate is unlikely to rise sharply."

■ Nationwide​

Vacancy rates declined q-o-q in eleven of the thirteen cities surveyed in Q4 2016. Demand from companies seeking to open new offices or to expand remains solid despite the lack of availability and options. A space shortage has prompted a few tenants to rent offices in separate buildings or to adjust the office layout of their existing premises. The lack of supply in regional cities has now become severe, with multiple companies competing for a space when it becomes available. During the quarter, vacancy rates reached new record lows in Sapporo, Saitama, Kyoto, Kanazawa, and Fukuoka. In Osaka, as aforementioned, there was also a big drop in the vacancy rate; it fell below 4% for the first time since Q4 2007. In Yokohama, vacant units were let to companies opening new offices or moving out of their own buildings. This pushed the vacancy rate below 5% for the first time since Q4 2008. Assumed achievable rents rose in all ten regional cities for the third consecutive quarter. Sapporo and Fukuoka recorded large q-o-q rises of over 2.5%, while there were also rises of 1% or more in Kyoto and Hiroshima.

■ Nationwide Vacancy Rates and Assumed Achievable Rent

Source: CBR​E, Q4 2016

■ Tokyo

Source: CBRE, Q4 201​6

■ Osaka

Source: CBRE, Q4 2016

■ Nagoya​

Source: CBRE, Q4 2016

■ Vacancy rates inten regionalcities​

■ Assumed achievable rents in ten regional cities​

Market data and detailed discussion of market conditions for each city can also be found in the Japan Office MarketView Q4 2016 published on January 30th or on the CBRE website. www.cbre.com​